Advisor Caught with Hand in Cookie Jar

By Eve Kaplan, CFP® Practitioner

Here’s a sobering tale about an advisor who got caught with his hand in a cookie jar. The theft occurred in Marlboro Township, NJ but it could have happened anywhere. Jordan Zemlock, 50, an advisor/insurance salesman, was sentenced up to 10 years in prison last week for defrauding 20 clients out of $1.4 million. Most of these clients were senior citizens.

Surprisingly, Zemlock’s registration with a key oversight agency, the Financial Industry Regulatory Authority (FINRA) lapsed 7 years ago.  Zemlock, who pleaded guilty to theft by deception, was arrested a total of 3 times for taking money from clients and using it for personal expenses instead of investing it.

This theft is alarming for a number of reasons:

1. Most of the defrauded clients were senior citizens. This demographic is especially easy to defaud and the situation only will get worse as aging Boomers rapidly grow in numbers.

2. Defrauding 20 clients of $1.4 million means the average client had $70,000 stolen – a small enough sum to be overlooked by many investors. Apparently the fraud took place between 8/2009 and 3/2012. Zemlock was confronted by victims in 3/2012 so the fraud had been going on for nearly 3 years.

3. Zemlock had not been registered with FINRA since 2006. This is the government agency that overseas brokers. Who dropped the ball in terms of oversight? It’s a pity his clients weren’t aware Zemlock had no proper regulatory oversight.

Various regulatory agencies monitor various types of advisors. Brokers, who sell investments on commission, fall under FINRA auspices. Advisors whose firms are Registered Investment Advisors, are overseen by other regulatorys. RIAs who don’t sell securities and receive payment only fromfees are subject to oversight by the SEC (if they manage more than $100 million) and state regulators if they manage less than $100 million. (note: Kaplan Financial Advisors is a Registered Investment Advisor in the States of NJ and NY).

What can you do to make sure your advisor (or your parent(s)’ advisor) doesn’t have his or her hand in your cookie jar?

1. A recommendation from someone you trust isn’t enough….research the individual and/or firm by going to regulatory agencies.  The Securities and Exchange Commission’s website has a search function for individuals and firms.

2. Check with voluntary agencies, such as the Certified  Financial Board of Standards, if your advisor is a Certified Financial Planner® Practitioner: http://www.cfp.net The CFP board will list suspensions or bar advisors for life for various offenses.

3. If you work with a Registered Investment Advisor (RIA), make sure you receive a copy of the advisor’s compliance paperwork called “Form ADV.” This document, filed with state regulators, provides details about an RIA – including any disciplinary problems.

4.  Where is your investment money held? Your account money always should be visible 24/7 at a custodial institution such as TD Ameritrade, Fidelity or Schwab. (Madoff clients were easily duped in this way for years).

5. If your elderly parents work with a financial advisor, is there another professional they trust (and have worked with) who can be a 2nd set of eyes and receive duplicate statements? Perhaps an attorney or CPA? If that isn’t feasible or possible, is your parent willing to have you or another relative receive duplicate financial statements in order to keep an eye on things?

Here’s a quick list of questions that government regulators suggest you consider when interviewing a financial advisor:

  •  What experience do you have, especially with people in my circumstances?
  •  Where did you go to school? What is your recent employment history?
  •  What licenses do you hold? Are you registered with the SEC, a state, or FINRA?
  • Are the firm, the clearing firm, and any other related companies that will do business with me members of SIPC? The SIPC seeks to make investors whole if their brokerage fails and can’t reimburse them all their money.
  • What products and services do you offer?
  • Can you recommend only a limited number of products or services to me? If so, why?
  • How are you paid for your services? What is your usual hourly rate, flat fee, or commission? (note: I’ve written extensively about this before – use a fee-only advisor to minimize conflicts of interest).
  • Have you ever been disciplined by any government regulator for unethical or improper conduct or been sued by a client who was not happy with the work you did?
  • For registered investment advisers: will you send me a copy of both parts of your Form ADV? (note: a registered investment advisor is required to give you this disclosure document about him/her before or during your initial meeting).

Regulatory authorities are stretched in terms of monitoring financial advisors. Only additional vigilance on your part can lower the risk of meeting a rogue advisor who has no moral compass.

 

Copyright (C) Eve Kaplan, 2013. All rights reserved